At some point, in every trader’s career, you have to take a step back and ask yourself: “Is my trading strategy beginning to fail, or is this just the down swing in the overall probability picture?”. Every strategy has a probability that is naturally built in to it. Some are designed to be higher or lower but they all have points of failure. A 70% strategy still fails 30% of the time. What we need to see is, does this probability remain relatively constant. Of course there will be a natural ebb and flow to the shorter term probabilities but it should stay relatively constant given a margin for error.
When probabilities begin to swing wildly out of where they should be, then we need to begin to discern why it is happening. Of course one of the most obvious reasons this would occur is a drastic shift in market atmosphere. A rather calm market shaken up by a war would be a great example. It was stable, but then thrown straight in to chaos. Another instigator would be trading the wrong type of strategy in the wrong type of market. This could look like trading a range strategy in a trending market. It may work while the market was dead flat, but now that things have been shaken up, it doesn’t fit anymore and is more like a square peg in a round hole.
A few key things to understand and take in to consideration:
- How long has the change been occurring? A one day occurrence is much less relevant than a week long bout.
- The trading approach makes a huge difference. How often are you trading? A swing trader taking 0-3 trades a week will notice changes and adjust much less often because they trade so much more slowly. A scalper trading 20 times a day will notice the change much more quickly.
- What factors could be impacting the markets that have made them different? Is this is a short term change or a long term one?
- The probability of the strategy also plays a role. If you are trading a low probability strategy in favor of higher reward, you will notice much less quickly as your trades are naturally expected to fail. That said, a scalper who is taking the risk position in favor of probability will notice a shift much more quickly as they try to maintain higher accuracy
So maybe you have decided it’s time to change up your strategy? Awesome! Start SIMPLE! The goal isn’t to find some earth shattering, never before discovered, long lost trading secret here. Don’t reinvent the wheel. Our goal in changing our approach is to change as small of a piece as possible to create the changed necessary. By doing this, we can ensure that our approach remains constant and easier to follow. Along with that, we are humans — we’re not great at change straight away and the less changes there are, the better.
If all it’s going to take the shift your strategy from the red to green is an adjustment to entry location, then try to find a way to locate the exact same entries, but offset for a better price to get things in line. Really dig in to what part is failing to make the smallest change necessary. Maybe the exit just isn’t getting hit as often? Then modify the target for higher probability / higher risk or modify the entry to keep R:R on par.
By making subtle, but necessary changes to our strategies, we are slowly creating a much stronger and more resilient strategy that we can rely on for a career rather than a gig. As always, stay safe out there, keep those stops in play, and let the winners run!